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Posted by: Uma Shashikant and Deepa Vasudevan on Wed, Feb 11th, 2015

Statistical Magic: How the Economic Slump Vanished with the new GDP series

We have just been told by the Central Statistical Organisation (CSO) that India’s economy is projected to grow at 7.4% for the current year (2014-15) and that we actually hit 8.2% in the second quarter of this year.  With this India will emerge as one of the fastest growing economies in the world. It has already matched China’s growth of 7.4% for this year.

 

What did the CSO revise and why? Should we trust these numbers or brush them aside? We take you through the changes made, their purpose, and their impact on future economic analysis. It is important to understand the revisions since it is the revised data that will be used to measure, estimate, plan, and budget going forward.

 

The CSO has made three important changes to the computation of the GDP number:

  1. The base year for calculating India’s GDP has been brought forward from 2004-05 to 2011-12. This exercise, called revision of base year, is carried out approximately every five years. It ensures that GDP numbers capture recent structural changes in output and prices.
  2. In keeping with international practices, GDP growth is being measured in terms of market prices rather than factor costs.  Factor cost is the value of goods arrived at based on cost of production. Market price includes taxes. Any subsidies received by producers will be reduced from this market value.
  3. There have been modifications in the definitions of various components and the coverage, definition and organisation of data under various heads, the details of which will be published only by end February.

 

Consider Pic 1 below. The older series shows the estimates  that we had been working with until this release from the CSO.  The nominal GDP in the new series is actually   a bit lower at Rs. 129 trillion compared to the old series number of Rs. 126.5 trillion. It is the real GDP that has jumped from Rs.65 trillion to Rs.106.6 trillion. The moving of the base year from 2004-05 to 2011-12 means the inflation rate used to deflate the nominal rate has changed. 

 

Pic 1: Nominal and Real GDP (Rs. Lakh Crore/Rs. Trillion)

Nominal and Real GDP (Rs. Lakh Crore/Rs. Trillion)

 

When the base year  was 2004-05 the adjustment for inflation was quite steep, leading to a low real GDP rate. When the base year shifted to 2011-12, the inflation adjustment (called the GDP deflator that converts the nominal GDP to the real GDP) has altered significantly. Consider Pic 2 below.

 

Pic2: Nominal & Real GDP Rates and GDP Deflator (%) – Old Vs New Series

Nominal & Real GDP Rates and GDP Deflator (%) – Old Vs New Series

 

The nominal rate of growth in GDP for 2014-15 is 11.54% (new) as against  13.4% estimated earlier. This has happened due to the revised definition of the GDP and revisions in the components.  Targets of expenditure and deficits are often set as a percent of GDP; if the GDP denominator changes, these estimates will have to be changed too. The new lower GDP makes the 4.1% fiscal deficit target for 2014-15 a tad more difficult to achieve and the current account deficit a tad higher than before.

 

It is also clear from Pic 2 above, that the GDP deflator has actually dropped significantly, accounting for the euphoria about the new 7.4% growth estimate for 2014-15.  What is popularly published and used in common discourse is the real GDP growth rate. From an anaemic 4.74% in 2012-13 to a tentative 5.02% in 2013-14, we were looking at a 5.90% estimate for the current year.

 

By moving the base year to 2011-12, which is a routine rebasing, the inflation number applied to the nominal GDP has dropped off to 3.85%, reflecting the current low inflation situation.  If the old series were to be used, that deflator would have been 7.08%. It is easy to see how the drop in the inflation numbers (GDP deflator) is matched by a corresponding increase in real GDP growth rate in the picture.

 

There is a lot more to the rebased GDP numbers in  terms of its components and the confusion that arises when we find that investment has actually grown and not faltered as feared. More about those details in another blog.

 

The summary story of this blog is that a fall in inflation rates can push up the real GDP, while throwing into some disarray the policy estimates and actions that depend on these numbers.

 

An improvement in GDP methodology is an excellent step forward, but there is only so much “growth” that can be generated through improved data collection. Real growth requires long term planning and policy reform.

sudhir b samant on Thu, Feb 12th, 2015 9:57:45 am

It is interesting to know how base changed has positively affected the GDP. Thanks for the article.

Dhirendra Kumar Srivastava on Thu, Feb 12th, 2015 6:56:25 am

Statistical Magic -in the view of these data provided by CSO we as a consultant can assume about the growth of indian economic but considering all facts we should not forgets that there are many other factors that change & alter growth even hamper this those factors are political ,geopolitical,climate conditions,& many other but good governance ,good planning firm determination to grow can lead to real growth as we have all basic infrastructure, young people with willingness to grow.i have been working with young people last 21 years & seen many changes in their thought & vision now days they are in different iew they want to do for the betterment of not only for themselves but also for country. At time of making planning consider their requirements like employment ,education ,sports,recreational activities promotion,& environment in that they can grow fearless . Thanks

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